Nicholas Kristof Gets His History Backwards
In a column in the New York Times, he writes:
"But one of the most basic principles of economics is that when an economy is anemic, governments should use deficit spending as a fiscal stimulus, even though that means an increase in debt. If Senator Rubio believes that the response to a weak economy is to slash spending, he is embracing the approach that Herbert Hoover discredited 80 years ago."
Kristof has his historical facts precisely backwards. From 1929 to 1932 federal spending increased by 50% in nominal terms, doubled in real terms, tripled relative to national income. Judged by that measure, Herbert Hoover makes Barack Obama look like a fiscal conservative.
Kristof is not the only one to subscribe to this particular historical myth. Just over a year ago, I wrote a op-ed that appeared in several places, responding to the same mistake made by David Frum, a conservative commentator.
As I pointed out there, we do have an example of a Republican president who responded to a surge in unemployment in the way they think Hoover did. From 1920 to 1921, unemployment rose from 5.2% to 11.7%, almost as sharp an increase as from 1930 to 1931. Harding responded by sharply cutting spending. By 1922, federal expenditure relative to national income had dropped almost fifty percent.
And the unemployment rate was back down to 2.4%.
That does not prove that Kristof's (and Frum's) view of the relevant economics is wrong; proof is hard to come by on such questions. Perhaps there were other features of the two episodes that explain why the Great Depression that happened in the thirties did not happen in the twenties. But both of them chose to base their argument on historical facts, and the historical facts are the exact opposite of what they claim.
daviddfriedman.blogspot.com
FRIEDMAN: A tale of two Great Depressions
At the recent Conservative Political Action Conference in Washington, the winner of the straw poll was Rep. Ron
Paul, Texas Republican. One of his best-known positions is support for a return to the gold standard. David Frum, a former speechwriter for George W. Bush and a fellow at the conservative American Enterprise Institute, responded by blaming the gold standard for the Great Depression:
“Threatened with the exhaustion of its gold supply, the government felt it had no choice: It had to close the budget deficit. So, in the throes of a severe downturn, the U.S. government did exactly the opposite of what economists would otherwise advise: It cut spending and raised taxes - capsizing the economy even deeper into depression.”
As Table 1 shows, that version of the history of the Great Depression is entirely fictional. During every year of President Hoover’s administration, from 1929 to 1933, federal expenditure increased. By 1932, expenditure had gone up 50 percent measured in dollars, almost doubled measured in purchasing power, tripled measured as a fraction of national income. If a gold standard makes it impossible to increase federal spending in response to a downturn, Hoover didn’t get the message. If stimulus is the solution to high unemployment, the Great Depression should have ended almost before it began.
This raises an obvious question: What would have happened if Hoover had done what the urban-legend view of history claims he did? For a possible answer, it is worth looking back a decade at a different Great Depression.
From 1920 to 1921, the unemployment rate increased by 6.5 percentage points; prices fell by more than 10 percent. Seen without the benefit of hindsight, it obviously was the beginning of a depression. Comparing the increase in unemployment and decrease in prices from 1920 to 1921 to the almost identical figures for 1930 to 1931, it was going to be a Great Depression.
President Warren G. Harding acted as Hoover is supposed to have acted. By 1923, federal expenditure had been reduced to about half its 1920 level. Table 2 shows the result. The unemployment rate that peaked at 11.7 percent in 1921 had fallen by 1923 to 2.4 percent. The country endured one year of high unemployment instead of, under Hoover and then Franklin D. Roosevelt, 11.
It was the Great Depression that didn’t happen.
David Friedman is an economist and law professor at Santa Clara University. His most recent book is “Future Imperfect: Technology and Freedom in an Uncertain World” (Cambridge University Press, 2008).
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